Tony Soprano would be outraged; Governor Chris Christie and New Jersey’s congressional delegation should be. Every year, the state of New Jersey loses enormous wealth through the Medicaid program. As it happens, its neighbor to the north is gaining almost exactly that amount through its enormous Medicaid program—one full of waste and bloat. It’s fair to think of this Medicaid financing scheme as one that simply takes dollars out of New Jersey and gives them to New York.

Washington provides an open-ended reimbursement of state Medicaid spending. More than 60% of state Medicaid spending is paid by the federal government, which is another way of saying that the bulk of each particular state’s Medicaid spending is financed by taxpayers dispersed throughout the entire country. Because Medicaid spreads the burden of state spending decisions in this way, many states grow inefficiently large programs and create numerous accounting gimmicks to access as much federal money as possible. After all, every extra dollar that they spend is largely coming out of the pockets of people outside their jurisdiction.

Despite being one of the nation’s wealthiest states, New York receives about $6 billion a year more in federal Medicaid spending than its residents pay in federal taxes to finance other states’ Medicaid spending. In contrast, New Jersey receives about $6 billion a year less in federal Medicaid spending than its residents pay in federal taxes to finance other states’ Medicaid spending. Without fundamental Medicaid reform that ends the open-ended federal reimbursement of state Medicaid spending, states, exemplified by New York, will continue to grow large, bloated Medicaid programs that provide too little value to many program enrollees to justify the expense. And states like New Jersey which have not grown such expensive programs will continue to lose wealth to those that have.

Medicaid Financing

In 2015, the federal government sent $350 billion to states through the Medicaid reimbursement. For most categories of Medicaid enrollees—lower-income children and pregnant women, low-income seniors also on Medicare, and the disabled—the federal reimbursement percentage is a function of state per capita income. The percentage is set at 50% in states with the highest per capita income and at about 75% in states with the lowest per capita income.

The intent of reimbursing poorer states at a higher rate was to transfer resources from wealthier to poorer states, since wealthier states could better afford to support their own Medicaid populations. In practice, however, federal financing has increasingly become a function of state financing gimmicks, such as provider taxes. Thus, some wealthy states that employ loads of financing gimmicks and have created massive programs receive much more federal funding than poorer states. For example, New York (per capita income of $68,193 in 2013) received about $8,400 in federal Medicaid spending per person in poverty in 2013—the year before the Affordable Care Act (ACA) Medicaid expansion took effect—while South Carolina (per capita income of $38,300) received only about $3,900.

In addition, the ACA created a new Medicaid eligibility category of non-disabled, childless adults and provided a much higher federal reimbursement rate for this population—equal to 100% through 2016 and then gradually phasing down until it reaches 90% in 2020. This elevated reimbursement rate worsens Medicaid’s structural problems, exacerbating the incentives of states to misspend and creates a bias in federal policy against the traditional Medicaid populations. In states that have adopted the expansion, the high reimbursement rate has led to an explosion of enrollment and spending. For example, total expansion spending in 2015 was more than 60% above government projections made in 2014.

New York’s Medicaid Industrial Complex

A bipartisan 2013 congressional committee report (“Billions of Federal Tax Dollars Misspent on New York’s Medicaid Program”) noted New York’s long-standing approach to Medicaid financing as being epitomized by its budget division’s mantra: “[i]f it moves, Medicaid it; if it doesn’t, depreciate it.” The report concluded that “[t]his historical State-approach to Medicaid financing may be a reason for the State misspending tens of billions of Federal tax dollars over the past few decades.” Here are some specific examples:

• New York received roughly $15 billion in unallowable federal reimbursement over more than two decades from large overpayments received by many state-operated institutions that treated and housed Medicaid patients with developmental disabilities. The daily Medicaid rate per patient equaled $5,118 in 2011! One former New York State official dubbed residents of these facilities “cash cows” for the state. 
• New York City allowed thousands of people to improperly access Medicaid for personal care services, at an approximate annual cost of $150,000 per person. According to the U.S. Attorney’s statistical expert, the total cost of the improper Medicaid charges ranged from $990 million to $2.6 billion using conservative assumptions.
• Janice Eulau, a Medicaid administrator in Long Island, testified to Congress about the ease with which relatively wealthy New York residents can protect their assets by enrolling in Medicaid, estimating that 60% of applicants engage in estate planning to gain eligibility:
  “I have witness[ed] the diversion of applicants’ significant resources in order to obtain Medicaid coverage. It is not at all unusual to encounter individuals and couples with resources [beyond exempt resources] exceeding $500,000, some with over $1 million. There is no attempt to hide that this money exists; there is no need. There are various legal means to prevent those funds from being used to pay for the applicant’s nursing home care. Wealthy applicants for Medicaid’s nursing home coverage consider that benefit to be their right, regardless of their ability to pay themselves.”
• James Mehmet, a former chief Medicaid investigator in New York City, estimated that more than 10% of the city’s Medicaid spending was fraudulent, with an additional 20% to 30% spent on unnecessary services. A 2005 in-depth investigation by The New York Times found that New York’s Medicaid program “misspen[t] billions of dollars annually because of fraud, waste, and profiteering."
• A legal industry helps applicants’ children protect their future inheritances by creatively arranging applicants’ finances to meet eligibility rules. According to a former New York state comptroller, “[a]t an unknown cost, middle- and even upper-income families often take advantage of these Medicaid services to avoid the major costs of caring for their elders."
• Spousal refusal, a technique in which a couple shifts assets from a sick or disabled spouse to a healthy spouse in order to “artificially impoverish” the sick or disabled spouse and qualify them for Medicaid, is frequent in New York. The healthy spouse declines to provide financial support for the artificially impoverished spouse. According to The New York Times, “[w]hile many state and local governments do not openly acknowledge the spousal refusal option, New York City actually provides a form letter for it.”

New Jersey and Other States Are Much Poorer Because of New York’s Medicaid Largesse

New York and New Jersey are relatively wealthy states. According to the intent of the federal-state Medicaid financial structure, New York and New Jersey should therefore be net payers into the Medicaid program—paying more in federal taxes to finance the federal share of program expenditures throughout the country than they receive in federal reimbursement for state spending. However, New York’s Medicaid industrial complex has resulted in the state receiving billions more in federal Medicaid money than its residents pay in federal taxes to finance the federal share.

The table below contrasts New Jersey and New York Medicaid spending data in fiscal year (FY) 2013—the year before the ACA expansion took effect—and FY 2015—the second year of the ACA expansion. In 2013, New York received $26.5 billion from the federal government for its Medicaid spending and New Yorkers’ share of the federal Medicaid tab amounted to about $20.4 billion. As a result, New York received a net transfer of about $6.0 billion in 2013 through Medicaid. That same year, New Jersey received $5.3 billion in federal reimbursements for its Medicaid spending and New Jersians’ share of the federal Medicaid tab amounted to about $11.5 billion. As a result, New Jersey had a net outflow of $6.2 billion through Medicaid. In 2015, the numbers were a bit worse for each state—New York received an inflow of $5.0 billion and New Jersey had an outflow of $6.9 billion. Despite New York and New Jersey adopting the ACA expansion, the states were both worse off because their residents, who are wealthier on average, had to finance other states’ expensive expansions.

In 2013, New York received five times as much money in federal Medicaid spending as New Jersey although its population was only about twice as large. Because New Jersey added a relatively larger number of people to Medicaid through the ACA expansion than New York (New York had already expanded Medicaid to many people made eligible by the ACA), New York received only about four times as much federal Medicaid money as New Jersey in 2015.

Although the ratio of New York’s Medicaid spending to New Jersey’s Medicaid spending may have declined because of the ACA, the central point is that the ACA has resulted in a spending explosion in states adopting the expansion. Therefore, despite New Jersey’s own surge of federal Medicaid money from the expansion, New Jersey’s net income loss is even higher in 2015 than it was in 2013! States like New Jersey are being told that expansion is good for them—but because all the expansions nationwide must be financed, many states that actually expanded are worse off from the ACA Medicaid expansion.

One metric of the equity or inequity of federal Medicaid spending is spending received by the state per person in poverty. In 2013, New York received about $3,200 more in federal Medicaid spending per person in poverty than New Jersey, with that difference declining to about $2,700 in 2015. Of crucial importance, the amounts of federal Medicaid spending per person in poverty in both New York and New Jersey are both high—$11,559 and $8,820, respectively, although New York’s receipt of federal Medicaid dollars per person in poverty is extremely high.

Conclusion

Fundamental Medicaid reform would make states more accountable for their decisions about the program. Under a system of fixed federal payments to states, states would have a much greater incentive to root out waste, fraud, abuse, and misspending in their Medicaid programs. By realigning the incentives facing states while freeing states from many federal rules governing their programs, Medicaid reform would likely result in much more effective use of taxpayer money.

Note on the bipartisan congressional report cited above: I was a senior professional staff member with the House Committee on Oversight and Government Reform and wrote a significant portion of the Committee’s 2013 report referenced in this article.    

Note on the state share of federal Medicaid tab: All government spending must be financed which means the burden on states for paying the federal Medicaid tab includes current taxation as well as future taxes to finance the deficit spending. Therefore, to calculate each states’ present value burden of the current year federal Medicaid expenditures, I multiplied each states’ share of Internal Revenue reported revenue for the year by the total federal Medicaid spending in the 50 states plus the District of Columbia for the year.